What Do Baosteel's Financial Results Portend for Steel Markets?

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Ferrous Metals

The famous saying, as Maine goes, so goes the nation may not aptly describe the current state of politics but we can’t help but still feel that all eyes are on China. So the question we ask is this, as China goes, does America go with it? And as my grandmother used to say when asked a complicated question, the answer is both yes and no. With No. 1 China steelmaker Baosteel’s recent earnings announcement of a 93% profit plunge for the first half of 2009 due to poor demand from automakers and ship-builders, the prospects for the second half of the year surely has to be better.

And according to this article from ShanghaiDaily.com, Baosteel President Ma Guoqiang said, In the short term, it’s not very likely that demand would slump significantly. The article also states, ¦.the property market will play a key role in helping steel demand to grow and the Chinese economy is set to rise in the second half. That may be so but one growing risk in China points precisely to that specific market segment ” property. In addition, Guoqiang is also quoted as saying, steel prices could probably rise after having undergone a correction as the demand fundamentals are still good and the international market is also recovering. Here, Baosteel’s future may depend in part on western demand. Certainly, the US steel mills believe the market may be tightening (or rather the mills will see if they can create a situation in which markets become tighter) by canceling spot market contracts beginning in October. This could create opportunities for foreign imports. (We’ll cover in a later post some of the more recent anti-dumping activities that will continue to play a role in global steel markets).

In the meantime, Baosteel has come to an agreement with Aquila Resources Ltd of Australia to purchase 15% of the company and to help Aquila develop several key raw materials including iron-ore, coal and manganese. The deal is interesting for a number of reasons. Besides supplying Baosteel with key raw materials, it represents the first direct investment for the steelmaker. Second, the deal will allow Aquila to access cheap financing for major projects. Finally the deal will likely win approval from Australia’s Forign Investment Review Board (FIRB) despite a string of controversies around the subject of iron ore.

Clearly Baosteel is positioning for the longer-term.

–Lisa Reisman

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